5 Strategies for Day Trading Cryptocurrency

By Brian Nibley · July 30, 2021 · 7 minute read

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5 Strategies for Day Trading Cryptocurrency

The term “day trader” comes from the stock market, where trades generally only happen during regular business hours on weekdays. One notable difference when day-trading cryptocurrency is that crypto markets stay open 24 hours a day, 7 days a week.

For would-be day traders, it helps to know some day-trading basics along with a few things to know before investing in crypto in this manner.

First, What is Day Trading?

Day trading is a short-term trading style involving trades that are bought and sold during the same trading day. This is also sometimes called “intraday trading.” Day traders attempt to use intraday trading strategies to profit from the price moves of a particular asset or financial instrument.

Recommended: What Is Day Trading?

Things to Know About Crypto Day Trading

There are two market conditions that must be present for day trading to be profitable:

•  Liquidity: Traders need to be able to enter or exit trades quickly without moving prices too much. In a market with low liquidity, slippage—when a large position can’t be liquidated at the price a trader desires—could eat into a trader’s profits. With slippage, the position must be sold in increments, with each order having a lower price than the previous one, leading to smaller gains overall by the time the whole position has been sold.

•  Volatility: A lack of volatility means prices aren’t moving, and there’s no chance of buying low and selling high. Because day traders try to buy and sell during the same day, markets have to be going up and down on a short-term basis for this strategy to be viable.

Crypto mining could also play a role in markets at times. If miners are selling most of their coins as they mine them, this could increase downward pressure on prices for a time.

5 Day Trading Crypto Strategies

On a multi-year timespan, simply holding certain cryptocurrencies has been a profitable strategy in some cases, not in others.

So when considering how to invest in crypto, one strategy might be to just buy and hold. This can be especially true during crypto bull markets, when corrections tend to be short-lived. However, it’s also important for investors to remember that Bitcoin and other cryptocurrencies are highly speculative investments. Just because an investment has risen in the past, that doesn’t mean it will continue to do so.

For investors specifically interested in day trading, there are numerous strategies to try. Technical analysis might be among the most popular strategies, as entire communities of traders have sprung up around this school of thought.

One thing’s for sure: having a rule-based trading strategy of some kind is a must for short-term traders. Here are five strategies for day trading cryptocurrency.

1. Technical Analysis

Technical analysis (TA) involves using mathematical indicators and chart patterns to try and predict which way prices will move next. Some technical indicators are simply generated with a computer program like TradingView (RSI, for example), while others must be identified by humans looking at charts (the cup-and-handle pattern, for example).

One popular technical indicator is the relative strength index (RSI). This appears as a single line beneath a chart with a value between 0 and 100. The closer the RSI gets to 100, the more overbought conditions are thought to be, meaning prices could fall. The closer the RSI gets to 0, the more oversold conditions are thought to be, meaning prices could rise. This is one example of how someone day-trading cryptocurrency might use TA.

2. News and Sentiment Analysis

While it’s less popular among short-term traders, looking at headlines and overall market sentiment can also be used in crypto day-trading. Sometimes, big news items can move crypto markets quickly.

For example, on the day this article was written in mid-April 2021, the nation of Turkey announced that it would ban Bitcoin and other cryptocurrencies as payment options within its borders. This sparked a global crypto market selloff, with Bitcoin falling about 3.2% initially and more than 10% later.

Additionally, there are websites that attempt to track the sentiment of the most popular cryptocurrencies by analyzing Twitter chatter. More positive tweets about a crypto equals more bullish sentiment, while more negative tweets equals more bearish sentiment—or so the theory goes.

3. Range Trading

Range trading assumes that prices tend to move within a certain range. Using this strategy involves looking at candlestick charts and support and resistance levels.

Traders might buy when prices reach a support level and sell when prices reach a resistance level. Or they might go short when prices hit resistance and close out the short when prices fall to support.

Pivot points are an example of range-bound trading. Calculating pivot points gives investors an idea as to what price levels are likely to see reversals in momentum.

4. Scalping

This strategy involves trying to profit from very small price moves over short periods. Often these are market inefficiencies like gaps in the bid-ask spread or gaps in liquidity.

Because they are aiming to take advantage of tiny price movements, “scalpers” often trade using leverage like margin or futures contracts to amplify their gains. This also amplifies potential losses, however, so managing risk is especially important with this strategy.

Scalpers might utilize strategies like volume heatmaps, order book analysis, or a range of technical indicators to determine entry and exit positions for their trades.

Due to the fast-paced and high-risk nature of scalping, it’s better suited for experienced traders.

Recommended: What Is Scalp Trading and How Does It Work?

5. Bot Trading

Bot trading, or high-frequency trading (HFT), involves the use of algorithms and trading bots that can be programmed to execute a large number of trades very quickly. Using this method requires knowledge of advanced trading strategies and programming.

While crypto trading bots conduct the trading itself, high-frequency traders don’t simply sit back and let a computer program do all of the work. Trading bots involve coming up with a specific strategy, developing the appropriate program to execute that strategy, and then constant monitoring, backtesting, and updating of the algorithms to keep up with changing market conditions.

There are some pre-made trading bots available for purchase from certain dealers. One thing to keep in mind when considering such a bot is this: if the bot is profitable and easy to use, why isn’t everyone using it, and why are its creators selling it rather than using it themselves?

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Which Cryptocurrency is Best for Day Trading?

It depends on what’s currently happening in the crypto markets. As mentioned, liquidity and volatility are key for any day trading strategy, so any cryptocurrency with sufficient liquidity that is showing high volatility could be a good option.

It’s difficult to pinpoint specific examples—as any coin mentioned could be irrelevant by the time you read this article. Such is the volatile nature of cryptocurrency.

Crypto Day Trading: Taxes and Regulations

It’s important for traders to educate themselves about the rules and taxes associated with day trading in their area. For example, two important things for day traders to be familiar with are short-term capital gains taxes and the wash sale rule.

Short-term capital gains taxes apply to the sale of any asset that was held for less than a year. This means any earnings are taxed as regular income or at the “marginal rate,” so based on an investor’s tax bracket. The IRS changes these numbers every year in order to adjust for inflation. For the 2021 to 2022 tax rate, the rates ranged from 0% to 37%.

The wash sale rule is also a must-know for day traders. This rule prevents investors from taking a loss on their taxable income when they sell a security then buy the same security within the next 30 days.

There are many more nuances regarding taxes and day trading. Traders should consult with a certified tax professional to understand all the necessary details for their own situation.

What Are the Downsides of Day Trading Crypto?

The majority of people who engage in day trading lose money. An estimated 85% of professional money managers underperform their market benchmarks. Timing the markets can be difficult, and human traders now compete with sophisticated computer bots.

Another issue is trading fees. Every trade involves a small fee, and these fees can quickly add up when making large numbers of trades. Some crypto exchanges, such as Binnace, have their own exchange tokens that provide users a discount when paying trading fees in the form of that token. Even then, day traders still have to subtract fees from their profits.

The Takeaway

Day trading is a strategy that involves buying and selling stocks throughout the course of the trading day to try and turn a profit. With crypto, the trading “day” is even longer, as crypto markets are open 24/7. That said, day trading can be an especially risky pursuit, with no guarantee of profits.

Photo credit: iStock/MF3d

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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

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